Adding Heineken, Removing Danone & Shire
Adding Heineken — We believe Heineken is entering a phase where it will grow
profit faster vs. history and vs. its beer peers, yet this isn’t reflected in valuation and
isn’t fully appreciated by many investors, in our view. We believe Heineken’s growth
trajectory has accelerated for a number of reasons: (1) improved EM geographic
footprint, (2) Western Europe — where Heineken is very operationally leveraged —
should be much less of a drag given improving volumes, (3) substantial mix benefits
(brand Heineken is in very good health in most markets and the company is
leveraging its innovation and premium portfolio better than it has done in the past).
Recent 1H results Heineken (HEIN.AS) - We raise EPS 2% and expect a strong H2
were solid (3.5% org EBIT growth on a +14% comp), underpinned by mix benefits
and cost savings. However, 1H was held back by some issues that should improve
going forward: we expect (1) operational leverage benefits in W Europe to come
through in 2H, on much easier volume comps; (2) Nigeria should gradually improve
too, mainly in 2016E. On this basis, we expect an acceleration in profit growth in 2H
and FY16 for the group. Heineken trades at about a 7% PE discount to ABI and
SAB (and to EU Staples) on consensus numbers (more than that on our forecasts)
and we expect the gap to close over the next 12 months, on accelerating growth.
Removing Danone — We no longer believe the very low raw milk price will result in
the company posting much better than consensus margins. The 1H results
delivered EPS in-line with consensus (and below our forecasts) because
management used the low milk price to offset a number of 'one-offs'. We now
assume the pattern of 1H will be repeated in 2H15 against a backdrop where the
foreseeable problems are building (eg pricing pressure of infant formula in China).
We retain the Buy recommendation; relative to other consumer names, Danone
looks attractively valued, its sales growth is within the top quartile, its margin
progression looks more assured and it seems more able to cope with the sort of
speed bumps that may have knocked it off course in previous years. But we now
believe the investment will be a slower burn and take the opportunity to remove
Danone from Citi Focus List Europe.
Removing Shire — Citigroup Global Markets is acting as an adviser to Baxalta
Incorporated on an announced unsolicited acquisition proposal from Shire plc. As a
consequence, Citi Research is unable to publish forecasts or opinions in respect to
Shire plc and as a further consequence Shire plc has been removed from the Focus
List.
Citi Focus List Europe — European analysts’ 15-20 strongest Buy ideas for the
next 12 months. We believe that Citi analysts offer investors strong views with
differentiated analysis on Focus List stocks. Liquidity means some names with high
return expectations are excluded.